New Legislative Landscape as Egypt set to become a serious global contender in Green Hydrogen production

Egypt is gearing itself to become a heavyweight producer of green hydrogen and its derivative products, and has set its strategy to providing 5-8% of the world’s hydrogen by 2040, ramping up its GDP by USD 10-18 billion in the process. The Government has embarked on executing agreements, to develop green hydrogen projects and meet this goal. Ideally located in close proximity to Europe, Egypt is naturally fit to integrate its production into the European network of hydrogen pipelines, and to become a serious contender in the global green hydrogen market.

Introduction

Egypt is gearing itself to become a heavyweight producer of green hydrogen and its derivative products, and has set its strategy to providing 5-8% of the world’s hydrogen by 2040, ramping up its GDP by USD 10-18 billion in the process. The Government has embarked on executing agreements, to develop green hydrogen projects and meet this goal. Ideally located in close proximity to Europe, Egypt is naturally fit to integrate its production into the European network of hydrogen pipelines, and to become a serious contender in the global green hydrogen market.

New Legislative Landscape

Egypt first established its Suez Canal Economic Zone to promote economic trade and investment in 2015, which today serves as the focal point for Egypt’s green hydrogen strategy. The Suez Canal Economic Zone, established around a shipping lane which is host to 15% of the global maritime trade, is impeccably situated to serve as a logistics centre for the distribution and export of green hydrogen and its products.

On Tuesday 2nd January 2024, the Egyptian Parliament ratified the final bill designed to incentivize the development of new renewable energy projects centred on green hydrogen and its derivatives, which remains to be promulgated and entered into force. This legislation emerges amidst a backdrop of numerous other major economies advocating for the advancement and adoption of the environmentally sustainable green hydrogen. Regionally, both the UAE and Saudi Arabia have already pledged to substantial initiatives for green hydrogen production and its application. Egypt has galvanised efforts to align with this movement, and to contribute to the flourishing renewable energy market emerging in the Middle East.

To action its strategy, Egypt has embarked into entering a series of agreements, including  signing with a number of international investors, to start production of nearly 5 GW Green hydrogen which continues to expand as interest in green hydrogen grows. 

Egypt is capitalising on the opportunity to export its green hydrogen production to Europe — the rationale behind this comes down to simple mathematics. While the fossil price per barrel is estimated to reach USD 100-115 by 2030, the cost of producing hydrogen per kilogram from renewables will fall to USD 2.0-2.5 by 2030; a staggering price difference.

Green hydrogen is a renewable hydrogen obtained by the electrolysis of water, which is typically powered by environmentally friendly sources like wind and solar energy. It shows great potential as a clean energy carrier, that could naturally supplant traditional hydrocarbon-based energy, and pave the route to a more sustainable and eco-friendly energy market. The unveiled legislative strategy in Egypt included allocating substantial land and resources for the development of renewable energy projects, and drew significant external investments from EU partners. 

Who will benefit from the New Law? 

The new Act is focused on incentivising green hydrogen projects that are undertaken in partnership with competent authorities and within 5 years from the date of its enforcement.

In order to fall under its auspices, companies seeking partnerships with competent authorities are required to incorporate as joint stock companies, with the founding shareholder being a juristic person, and with the company’s primary objective set to execute one or more green hydrogen production projects or its derivatives.

The Act exclusively lists 5 types of green hydrogen projects to fall within its ambit, being:

1. Green hydrogen production plants and its derivatives;
2. Desalination water production plants, that are specifically dedicated to producing at least 95% of their output for use in the production of green hydrogen and its derivative;
3. Power plants that generate electricity from renewable sources, which are specialized in producing at least 95% of their output to supply green hydrogen production facilities and their derivatives, as well as desalination plants referred to above;
4. Projects that are focused on transporting, storing, or distributing green hydrogen and its derivatives within Egypt.
5. Projects that are directly involved in manufacturing or supplying the necessary inputs for green hydrogen production facilities mentioned in (1) above, as per a decision issued by the Cabinet based on the recommendations of the competent Minister and following consultation with the Minister of Electricity and Renewable Energy and the Minister of Finance.

What are the incentives?

The ratified bill introduces significant tax incentives targeted at fostering the growth of the green hydrogen industry in Egypt. 

Projects engaged in the production and expansion of green hydrogen will be entitled to following benefits: 

• Tax Rebates: Eligible projects will receive a tax rebate ranging between 33% to 55% of the income tax paid. This rebate will be facilitated by the Ministry of Finance within 45 days from the deadline of the tax return submission. 
• General VAT Exemptions: The legislation provides a generally comprehensive exemption from Value-Added Tax (VAT) on essential equipment, machinery, raw materials, and related assets necessary for the execution of a green hydrogen related project. 
• Export VAT rate set at zero: all green hydrogen and derivative exports will benefit from zero tax on all exports of green hydrogen and derivative products.
• Additional Exemptions: the law further grants exemptions from various taxes and fees including real estate taxes, stamp taxes, incorporation fees, and other levies.

In addition, the companies and projects focused on green hydrogen will entitled benefits including, inter alia: 

• Simplified Approval Process: to enjoy the incentives, companies should possess a certificate issued by the competent minister. This certificate will be considered final and self-sufficient, without the need for any additional approvals from other entities. 
• Foreign Worker Employment: companies will enjoy the flexibility of employing up to 30% of their workforce as foreign employees.
• Reduced Usufruct Value: a 25% reduction in the usufruct value of industrial lands designated for green hydrogen production plants, and 20% reduction for storage warehouse real estate. An additional grace period is also extended to the project company for the payment of usufruct real estate. 

To qualify for the outlined incentives and benefits, companies must adhere to criteria, such as:

• The project's commercial operations must commence within 5 years following the conclusion of the project agreements.
• The project, including expansions, should rely on foreign exchange financing from abroad, at a rate not less than 70% of its total investment cost.
• The project is mandated to prioritize the utilization of locally manufactured components available in the domestic market, ensuring a minimum of 20% of project components are locally sourced.

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